Continuously elevated oil prices are steering the global economy towards an unsettling macroeconomic environment characterized by slowing growth alongside persistent inflation. Morgan Stanley cautions that the true risk lies not in a single sharp oil price shock, but in the profound consequences of high prices being sustained over the long term without a significant decline.
According to analysis, a research team led by Seth Carpenter, Morgan Stanley's Chief Global Economist, indicated in a recent report that geopolitical tensions surrounding the Strait of Hormuz, even without escalating further, could maintain partial constraints on crude oil supply for a considerable period. This would keep oil prices consistently elevated with a geopolitical risk premium.
Under this scenario, the global economy faces not a transient price shock but a protracted increase in energy costs. The macroeconomic implications of this would be far more complex than any historical oil price shock and exhibit distinct stagflationary characteristics.
The direction of this shock is stagflationary, leading to a significant divergence in monetary and fiscal policy responses, which will impact different economies in markedly different ways. For investors, this implies that expectations for interest rate cuts require repricing, and the varying policy paths of different nations will become a critical variable for asset allocation.
Inflation Risk Underestimated: Secondary Effects More Persistent Than Historically Observed
Morgan Stanley points out that the fundamental difference in this oil price shock compared to past episodes is the "persistence" of prices rather than their "peak." In previous shocks, prices often rose sharply but then retreated quickly, naturally shortening the duration of inflation pass-through.
However, if oil prices remain high for an extended period without mean reversion, businesses will face a prolonged cost shock. Their ability to absorb these costs by compressing profit margins will gradually erode, eventually forcing them to pass the pressure on to prices.
This means that even if the year-on-year increase in energy prices mathematically narrows over time, the secondary effects—the transmission of energy costs into broader goods and services prices—will be more stubborn than historical experience suggests. Therefore, even if headline inflation data appears to improve superficially, inflation risks remain skewed to the upside.
Simultaneously, while growth is slowing, a collapse is not anticipated. Persistently high energy costs act like a hidden tax on consumption and corporate profit margins, dragging on economic activity in both developed and emerging markets. This drag takes time to fully materialize, but its impact should not be underestimated. The resulting global slowdown would mean that the disinflationary impulse from weaker growth is insufficient to offset the upward push from secondary effects—thus cementing the stagflationary pattern.
Central Bank Policy Divergence: Fed on Hold, ECB Leaning Hawkish
Confronted with stagflationary pressures, major central banks are showing clear divergence in their policy orientations, which will be a core variable influencing global interest rate markets.
Central banks more sensitive to inflation expectations, particularly the European Central Bank and the Bank of England, are inclined towards further policy tightening in the current environment. According to their latest projections, the ECB's next move is expected to be a 25-basis-point rate hike, anticipated in June 2026; the Bank of Japan is similarly projected to hike by 25 basis points in June 2026.
In contrast, the US Federal Reserve's situation is more complex. The Fed is expected to choose to pause rather than cut rates, and this pause could extend for a considerable time. Their baseline forecast indicates the next window for a 25-basis-point Fed rate cut is September 2026, but this is contingent on inflation expectations not showing significant upward drift. Should signs of rising inflation expectations emerge, the Fed might even maintain its restrictive policy stance until 2027.
The reactions of emerging market central banks are more fragmented, highly dependent on individual countries' fiscal positions and external vulnerabilities, making a unified policy direction unlikely.
Fiscal Policy: The Double-Edged Sword of Energy Subsidies Intensifies Global Divergence
On the fiscal policy front, the responses of national governments will profoundly influence the path of inflation and further exacerbate the divergence in the global macroeconomic landscape.
Many governments are leaning towards broad price-suppression measures, including cuts to fuel taxes, price caps, or universal subsidies, shifting the cost burden from households onto public or quasi-public balance sheets. While such measures can provide short-term缓冲, they distort price signals, support demand, and risk entrenching inflation at higher levels—especially when these measures become unsustainable due to limited fiscal space.
For energy-importing emerging markets with constrained fiscal space, broad subsidies could harm external account balances and policy credibility. Conversely, energy exporters benefit from improved terms of trade, with some gaining additional fiscal revenue. This divergence is a key reason behind the highly varied and difficult-to-coordinate policies of emerging market central banks.
In contrast, countries adopting more targeted support measures—focusing on vulnerable households or specific sectors while allowing more complete pass-through of energy prices—impose greater short-term pressure on consumers but entail lower fiscal costs and a more controllable inflation shock. The trade-off, however, is greater downside risk to growth. Given currently high debt levels, rising financing costs, and renewed fiscal rule tightening, the likelihood of large-scale fiscal intervention remains limited unless recession risks increase significantly.
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